Monoline bond insurers, hit hard by the credit crisis, received a rare piece of good news this week: credit ratings agency Moody’s Investors Service is telling them that a recently-issued accounting rule requiring more disclosure will not damage their financial strength or their ratings.
The rule in question is FAS 163, which governs accounting for financial guarantee insurance contracts. It clarifies an earlier ruling by the Financial Accounting Standards Board, and includes the recognition and measurement of premium revenue and claim liabilities. Further, it requires expanded disclosures about financial guarantee insurance contracts.
Moody’s, however, says that the changes will have only “modest” and “indirect” impact on the finances of the bond insurers, in spite of initial reductions in their equity.
“The change in accounting will not affect the underlying economics of the monolines,” according to Wallace Enman, a senior accounting analyst at Moody’s. “FAS 163 should not alter our assessment of the guarantors’ fundamental claims-paying ability.”
The rule change could have a negative impact on the monolines’ earnings patterns for their municipal businesses that rely on money up-front. But that could be partially offset by faster revenue recognition in their installment-premium businesses. The moderate impact that Moody’s noted could reflect the thinner equity cushions resulting from the impact of mortgage-related losses.
The Moody’s comments come as big bond insurers such as MBIA and Ambac have faced downgrades recently, both blaming mark-to-market accounting for weakening their positions. Last month, Enman responded to those complaints and argued that the accounting rules may not by themselves actually affect the bond insurers’ ability to pay claims. He acknowledged, however, that mark-to-market accounting was making it harder for the firms to raise capital and might be scaring off investors.